Is it too early for me to purchase my first home?

Time to help a reader out! Been getting a lot of similar questions like this lately, so figured I’d pass this along in case any of you are thinking about it too :) And to be quite honest, I think I’m wayyyyy too jaded with home ownership right now to give a non-biased opinion! Haha…

So when you’re done reading, maybe you can chime in and offer some words of wisdom yourself? I’m sure our reader would appreciate it – always good to get varying ideas on this stuff, esp since it’s a major decision!

Here’s the question from Mr. Future Homeowner, followed by my response below:

“I’ve been getting a lot of questions like this lately, so I thought I’d share my thoughts on it via this “Help a reader” post

I have a full time job as a video editor, working for a professional football team. My salary is low 30’s, but they pay for great health/dental/vision insurance, my cell phone, and I basically eat two out of the three meals of the day there. I contribute 5% of my income into my 401k and recently I started an emergency fund with a high yield savings account online (1.30%). My car is paid for (I got it when I was 16 as a gift from my parents) and it is in pretty decent shape.

The things I pay for include rent, some utilities, gas, and the occasional trip to the grocery store. I have about $8,000 in college loans and that is the only “debt” I have. Of course, when I’m not working crazy hours, I do try to have some fun. :)

I’m single, I’m 25, and I’ve been pondering the idea of purchasing my own home. The main reason is because I hate the fact that I’m basically throwing my hard earned money away paying a quarter of my monthly earnings for rent. I feel that I would much rather be putting that money into something I can OWN and build credit and of course, own my own home!

My question is this: According to my budget, I should have my college loans paid off in about 2.5 years. Do you think it would be wise to wait until I pay off my college loans, build up a savings account, and then buy a place of my own? Or… do you think it would be possible to purchase my own home and still pay the mortgage and college loans at the same time.

In April, I finally paid off two large credit cards that I had from college and now I am saving that money that I would be paying for a credit card.

I have read so many different things on this subject and it makes my head spin!”

I agree – it makes my head spin too! And unfortunately there’s no “right” or “wrong” answer here – just the one that YOU are comfortable with, ya know?

Pros to buying now: Prices are CHEAP! Mortgage rates are CHEAP! So if you know you want to live in an area for at least 3-5 years, then it’s a most excellent time to buy. Update: Can also deduct all that interest! Which is a biggie, can’t believe I forgot about that one.

Cons to buying now: Credit is MUCH tighter, you’re now in $xxx,xxx amount of more debt, you have to fix everything yourself (lots of $$), and you’re “stuck” in one place.

There are plenty more variables out there as you know, but those are the ones that go through MY mind when I think of this stuff. Personally, I want nothing more than to sell mine and go back to renting :) But then again I overpaid and bought way too much space when all I needed was 1/3 of it. I also have a problem staying in one spot in general, but that’s a totally different story (military brat).

Sooooooo, I’m probably the wrong person to ask about this cuz I’ll try and convince you NOT to buy one yet ;) I’d also probably tell you to save at least $10,000 in an emergency fund first too cuz houses are mad expensive! And you’re on the hook for it all by yourself too. BUT, if you’re asking me for a financially factual answer, I say go for it. The time is great for buying a house (esp your 1st since you don’t have to worry about offloading one either), and it seems you have your head on straight.

Be sure to find a realtor first, though, and get pre-approved so you know *exactly* how much house you can afford (within your budget!!!)). And also so you know what your average monthly payments will be around. Be sure to add in extra for homeowner’s insurance, a few hundred for maintenance, and also condo/home association fees.

Then try pretending paying this mortgage for 3-6 months so you know what it’ll be like! If you’re spending $500 renting, and your mortgage is $1,000, send an extra $500 every month into your savings account. After a few months you’ll see if it’s worth it or not and if you can handle it :)

So basically, follow your heart. I couldn’t get convinced NOT to buy when I really wanted to, but if i had to go back I would have paid more attention and bought a place at least 1/2 as much. There’s no rush – better to get it straight the first time and be 100% comfortable with it. The more you spend on a house, the more you now have to be on the hook for which cramps your lifestyle – esp as a single gent such as yourself.

Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!

I purchased a house recently with my significant other, and we were able to get under the homebuyer’s tax credit ($8000 woo!) We are both 24 years old. One reason we decided to do it (well besides the free $8000) was that its a duplex ($850 in rental income every month!), was in a great growing neighborhood, and mortgage rates were LOW (as in 4.75% low!). But a huge deciding factor was the fact that my significant other is extremely handy around the house. As in his dad is a contractor and he grew up fixing and building things. So we never have to pay for any maintenance- only the supplies he needs to fix/build anything.

I think had any of those variables not been in the equation we would have waited. As for the reader’s situation, with only one income in the $30K range it seems that it could be pretty difficult to support a mortgage payment, utilities, repair/maintenance and of course taxes. We bought a modest house for $140,000 and the principal and interest is $722, but taxes add on an additional $545 every month plus about $150 in utilities plus any repairs and maintenance! I would recommend he wait until he has at least a 20% down payment, a big time emergency fund ($10,000 sounds about right J ), and complete confidence that he will not lose his job. J you are right, houses are expensive! We are so happy we bought a house, but if I had to do it on my own I definitely would have waited!

Sounds like you don’t have a very large down payment – wait until you have 20% to put down, otherwise you’ll have to pay PMI…which IMO is nothing more than an impatience tax.

You’re single now, but be aware that it’s unlikely that a future partner will pick the same home as you.

You didn’t mention much about how long you plan on living in this home. I would be even more cautious than J$ – don’t buy unless you are planning on living in this home for a minimum of 7-10 years. If your timeframe is shorter than that, be prepared to see all the money you ‘saved’ by not owning instead of renting go right into a realtors pocket.

Me? I’d pay off the student loans, get a decent down payment and then look at buying a home. I love owning my home – but I say don’t buy it because you feel like you are throwing away money by renting. By renting, you have the freedom to up and walk away if you get a job offer in another location. Also, unless you are putting down a very heft down payment, or opting for a shorter than 30 year mortgage, only a pretty small portion of your actual mortgage payment actually goes to pay down your principal. If I only paid my minimum mortgage payment (which I’ve never done), at the start of the mortgage, only about 15% of each payment goes towards principal.

I’m 25 and single like you, and I thought about buying a home and building equity. I put a lot of thought into it and came to the following solution for myself.

1. The most important thing is that I will not buy a house until I can put 20% down AND I can afford a 15 year mortgage. When you compare a 15 year to a 30 year mortgage, the payments aren’t that much higher, and you’ll actually build equity in your house from the beginning instead of paying almost entirely interest in the first 5-10 years. Plus 15 year mortgages have lower interest rates.
2. I will only buy a house when I am reasonably certain I will stay in it for many years. This probably means I’d need to be married and have a very stable job.
3. I will need to have enough savings and disposable income to pay people to fix stuff when it breaks, because I don’t know how to do anything.

It doesn’t sound like you’re in that situation so I’d suggest not doing it, but those are just my rules.

Keep in mind that when you buy a house, you’re not magically making money, even if you spend 30 years paying off your house then sell it, you still need a place to live, so it’s not like it’s money in your pocket or anything. Also, when you rent you’re not tied down to a place for more than a year, you don’t have to pay for maintenance on your place, pay property taxes, and pay some of the utilities in most places.

I totally understand that it’s tempting to buy because of low prices and interest, but I’d say it really doesn’t make sense unless you know you want to say in the same location for the next 10-15 years. I say wait.

I bought my house when I was 21. The ONLY reason I felt confident that buying a home was the right decision was for the following reasons:

1. I had 20% down (I have always been a crazy saver.)
2. My apartment was running me $600/month, while my mortgage payment is now $532. But don’t forget about taxes, HOA, etc. This is an extra $360 for me.
3. To offset that $360, my existing roommate moved in with me. Her rent plus what I was paying on rent equals my mortgage payment, taxes and HOA.
4. I have a very secure job with a great company. Also, I was starting a Master’s program, which further ensured I would be living in my city for another 4 years.
5. The right house was on the market. Exactly what I wanted, located 7 minutes from my workplace, and walking distance to pretty much everything else. My car insurance dropped as a result.

So, my advice to you is to KNOW for sure that your job is everything, a slice of pie, and completely secure. Also, KNOW for sure that you have no interest in moving for awhile. I promised myself I would be in my house for at least 10 years and that I would make extra principal payments to pay it off within 10 years. And finally, absolutely have money down. And preferably 20%. Since you’re young, the bank may not even approve your loan for less than 10% down.

I felt like I was ready to buy last year, but prices and mortgage rates are still plummeting so I’m glad I didn’t. I live in a large metropolitan area (2.5 million people), but even the reduced home prices aren’t that attractive once taxes and insurance are considered.

I’m glad I didn’t buy yet, and here’s why: my girlfriend and I are sick of this town. We both grew up here and we feel like we’ve done all there is to do. We want to pick up in the next couple years and move out west. It would be incredibly difficult to do that if I was a new homeowner (and it’s already rather difficult due to a large amount of student loan debt).

I would wait for now. Not necessarily because you need 20% down or any other hooey, but because a) you don’t know what the future holds and you might meet someone and want to move to another city/state/country in the future, b) getting out from under that house within the next couple years would be almost impossible, and c) the market hasn’t bottomed out yet.

If you really want to own a house, make sure you want to live in that area for at least 5 years, then wait until the market moves upward slightly; you’ll then know it has bottomed out.

I think the best thing to do is first decide how much house you want and then figure out roughly how much the payments would be. Include taxes, insurance, estimated utilities and all that good stuff. After you come up with “your number” then iagree that you should play pretend house. Make that payment to yourself for a year or so to help you build up your savings. Then once you have at least 10% but preferably 20% to put down, you can go for it. The most important thing to realize is you shouldn’t rush into buying a house just because prices are cheap right now. House prices and mortgage rates probably wont start rising for a few more years..or at least not enough to make much difference. Don’t go into it until you’ve done your research and have a good down payment. After that I recommend getting a 15 year fixed mortgage because you will save a ton in interest.

Great advice! Whenever you decide to make “the purchase” be sure to enlist the help of a HUD-certified housing counselor. They can help you: identify first-time home-buyer programs (think, special interest rates, down-payment and/or closing cost assistance); understand how much house you can afford (including all of the fancy stuff :PITI); and review your credit report (you can do this at annualcreditreport.com, for free).

In addition to testing out ownership by putting aside the extra you’d pay on a mortgage, HOA, property taxes, do it assuming an mortgage at double the rate you could get now. As everyone has pointed out rates are low right now. If you had to refinance at some point could you still afford the mortgage when the rates have shot up? When saving up that 20% downpayment, don’t forget to save up the legal fees and moving costs.

Keep in mind you’ll need full insurance not just content insurance like an rental apartment and you’lll have new or at least increased utlilty costs. What about security system installation and monthly monitoring? You may “need” more or different furniture for the house, appliances, window treatments, add in a lawnmower, rakes, hoses, ladder etc etc. Depending on your weather you may want/need a snowblower as well. There are dozens of other costs associated with the purchase and getting settled and then others that will apply every month going forward. Figure all those one time and ongoing costs into the real cost of purchasing a house. Can you still afford it? If yes, now assume you’ll need to set aside about 2-3% annually for maintenance ($333-500/month on a $200k home). You likely won’t need it right away but sooner or later you’ll need to replace the roof, eavestroughing, furnace/AC, major appliances, kitchen renovation, laneway repairs, windows, hardwood/carpet/tile, deck or patio, etc etc.

Comparing your rent to the mortgage payment on a home and figuring renting is just throwing away money is an incomplete comparison. Make sure you really work out the true costs of ownership. I’d bet a lot of folks currently struggling to hold onto the homes bought with as much mortgage as they could qualify for, and hadn’t really allowed for all the extra costs that go on top of that. It’s really easy to under estimate the real costs and get in way over your head. Being so house poor that you can’t enjoy your new home will make you long for the good old days when you just paid your rent.

I don’t think that buying a property right now is a good option in your situation.

While the price are lower now in the states, it doesn’t mean that you have to buy a property right away. Especially since you have outstanding debts, no cash down and no emergency funds.

The problem with buying a house is that it generates a lot of “side costs” such as equipment, maintenant, closing fees, taxes, etc. Buying a house is one thing, taking care of all the associated cost is another. If you have not a good cash down, I suggest you wait a little bit before making any move. Pay off your debts ,gather more money and then, you will be able to purchase your first property while enjoying life (and not eat Kraft Dinner everyday!).

When you say that renting is akin to throwing away money, keep in mind that Mortgage Interest is the same thing. With renting, you pay rent on a home. With buying, you pay rent on money. It’s all still “throwing it away.”

I’m in a similar situation. Have some debt that will be paid off in 3 years but in the mode of buying my first house. I think he should go for it! Like you said, prices are cheap. I think a trial run (saving some while paying for your rent) is a great idea and I’m going to try it out.

Great question, J, and a good discussion of pros and cons. As you point out, there are so many individual variables that it’s hard to give a blanket answer.

Many of your readers have warned about additional costs, which a potential buyer needs to be aware of, but no one has mentioned the tax benefits available to homeowners. All that interest you pay on your mortgage every month is tax-deductible, while your rent payments are not. That by itself will help offset some of the additional costs. And the first-time homebuyer programs will help with some of the upfront costs.

Another factor that no one mentioned is that for the middle class in America, owning a home is the best way to build a nest egg. We’ve grown up in a society that demands instant gratification and having the latest toys NOW, so the enforced investment in a home is unfortunately the only “savings” many people have.

Another tax advantage of owning your home is that when you sell it, the profit you make (and there will be some, if you do your homework and buy it right) is tax-exempt, up to $250,000 if single and $500,000 if married. That’s right, tax-free income, the VERY best kind! And you can do it as often as every two years! See: http://www.irs.gov/businesses/small/industries/article/0,,id=98921,00.html

I know a real estate investor who has chosen the neighborhood and school district he wants to live in, and every two years, he buys and moves into another house in the same neighborhood, taking his tax-free gain and using it to establish college funds for his children and invest in more real estate. (Although in today’s housing market, I wouldn’t count on it appreciating enough in just 2 years for there to be a big profit on the sale. It will have to appreciate by an average of 10-12% in order for you to break even on the costs of sale.)

There’s a discussion of rent-vs-buy at Military-Money-Matters.com that’s geared towards military families, but you might find it helpful. There is also a mortgage comparison calculator at https://www.federalreserve.gov/apps/mortcalc/ that will let you compare the monthly payments and amount of equity you would build using several different kinds of fixed rate and adjustable mortgages.

I know this is too long, but one more important thing. I don’t advise people to take out 15-year mortgages, because that locks you into a higher payment amount, and if you have a financial reversal, you have to go through the hassle and expense of trying to refinance. As low as today’s interest rates are, my advice if you decide to buy is to take out a 30-year fixed mortgage at the lowest rate you can get. Then plan to pay it off early by making an additional principal payment with each payment (in the beginning, that could be as little as another $50 or so), or if you can afford it, pay an extra $100 or more every month with instructions to the mortgage company to apply it to principal. (Be sure your mortgage has a “no-prepayment-penalty” clause.)

Then, if you have a financial setback and can’t afford the extra payments you’ve been making, you can drop back to the regular mortgage payment for a few months till you get back on your feet, without the pressure of trying to refinance because you suddenly can’t afford those higher payments. Once you recover, go back to paying the additional principal amounts.

And I personally wouldn’t “pretend pay” — you’ll lose that many months of equity and tax-deductible interest. But figure your finances carefully to make sure you can afford the payments, taxes, insurance, repair fund, etc.

I’ll throw in my two cents since I’m closing on a house tomorrow and I have $28K in student loans as opposed to your 8k. Yes you CAN buy a home if you wanted however you have to make the determination if you SHOULD. They are very different questions and really none of us can answer the last part for you. Your biggest thing to look at is your shovel to hole because the salary is on the smaller side. I would encourage you to create a budget to make sure you can afford a house. Call a mortgage broker or a lender and have them put a estimated “initial fees worksheet” for you. They’ll run a credit check on you and you just tell them the purchase price amount and how much in earnest you put down and how much closing costs are being paid by the seller. That will aid you in your budget in terms of coming up with the principle & interest costs, hazard insurance premiums, real estate taxes, and mortgage insurance. People usually forget about the insurance.

The biggest items is going to be money to close ie cash flow, and on going maintenance. I am having to write a almost $9,000 check for closing costs yuck! However I did land a 4.00% flat rate. Also, there will be no more landlord and maintenance absolutely will happen.

If you do decide to buy PLAN FOR DELAYS. For example, we bid 150k on the house and the appraisal came back in at 140k. The sellers ended up disputing it, and this put a delay on our closing and now we are stuck closing during the week instead of on a Friday. Home prices continue to fall despite some bright spots in the country and appraisers these days are under a lot of pressure to get the values right because of potential litigation and because of pressure from the banks. Foreclosures and short sales keep driving down prices in areas.

I never comment but I feel like I must comment on this. My advice would be to wait until you have an emergency savings. My significant other and I bought a house when we were 21/22 after renting for 2 years. It was great. Until I lost my job. And then he lost his job. We were living in a city with a very high unemployment rate and neither of us could find a stable job. We didn’t have any savings and we were 3 months behind on our mortgage. There was no way we could sale the house. Short sale or regular sale. So instead of foreclosing, we decided to file bankruptcy at the age of 23/24 so that we could include our credit cards and we moved to a different state. Everything went through and we are rebuilding our credit and starting a savings. We are only 24 and we have been through more than most 44 year olds that I know! So please, get your emergency savings established first and then buy a house. I am completely for buying a house but you need that back up. You may think your job is great and you will never lose it but no job is guaranteed forever.

1. Are you averse to taking in roommates? Buying a 3BR 2BA house and splitting costs among 3 responsible adults can pay off big. Just always make sure you can handle the mortgage if your renters decide to ditch.

2. Are you handy? I bought a Fannie Mae owned foreclosure that needed some work. With some skill and our local Habitat for Humanity ReStore, I made the repairs and have another fantastic property.

I believe home ownership provides lots of benefits. Some financial perks and also some intangibles. It should not be thought of as the basis of your financial future though, at the end of the day I love to quote Carlin:

“That’s what your house is, a place to keep your stuff while you go out and get…more stuff! ”

Finally, Ignore what banks and lenders say you can afford. Go with your gut. You are almost always better off with a smallish, low cost 3BR/2BA single family home in a nice neighborhood. There are plenty out there. I recently bought a house for $107k that sold 4 years ago for $230. Great little house. Great Neighborhood. It is now renting for 25% above the mortgage. They are out there.

Guys, this is GREAT stuff!!! Two things I liked in particular (which I can’t believe I forgot about!):

1) The tax benefit to all that interest. Yes! I remember that being a huge selling point when we bought our home 3 years ago… shouldn’t sway you one way or the other as it’s a moot point if you’re not ready to buy yet, but it’s a great thing to be aware of once it’s time :)

2) The years you’re willing to live in the house. This was by far the #1 stupidest thing I chose to ignore. Over price of house, mortgage, amount of space, etc etc. I knew it was smart to stay put for 5-7-10+ years, but I just threw it out the window and said “Oh I’ll be fine” anyways. And here we are 3 years later and I’m going cRaZy here! Nothing to do w/ the house we purchased, but everything to do with the desire to move and live somewhere else.

So big thanks guys! Lots of great points and things to think about for our young house itching friend. I know he’s reading this cuz he passed it along to all his buddies (who knew a finance site could be exciting? haha..), and I can tell you he sincerely appreciates your time. You guys rock. And hopefully this helps others out there considering the big purchase too!

There is no way I’d ever buy a house this early in my life. I feel like I’m just getting started and I can afford all the nice things, I wouldn’t want to tie myself down with a huge mortgage. Like someone else said too, you meet a girl and she’ll probably want to pick out a house herself.

I agree with Bobby. Unless you know you will be able to sell your house easily, your setting yourself up for a 30 year commitment as far as Janet is concerned. Think about it, THIRTY years. I hate to say it but with a 30k income I don’t feel you would be able to truly afford a house because the mortgage is just one expense.

StackingCash, just to clarify: I’m recommending a 30-yr mortgage to give you lower minimum payments, which will give you maximum flexibility in terms of payments if things get tough financially (like one spouse loses their job, or unexpected big medical bills). But I strongly recommend you pay it off early by making an extra principal payment each month, or an extra $100 a month if you can.

And it’s really not a 30-year commitment most of the time. It’s very rare for anyone to stay in one home for 30 years these days (although many of our parents did). So when you sell the home, that mortgage is paid off, and you move on to another one, with (usually) tax-free profit to roll into the new house. It’s a great way to build a nest egg.

My other projects

Disclaimer

I, J. Money, only claim the thoughts from my head. I am not a banker, CPA, money manager or anything else of that sort. Please seek a professional for any "real" advice. More info: privacy & disclosure page